Prospects for the Seoul Summit

The fifth G20 summit, taking place in Seoul, Korea, on November 11-12, 2010, stands out as a significant event in several ways. It is the first time a G20 summit has been held in Asia, after the first four in the largely Anglo-American, Atlantic world. It is the first time the summit has been hosted by a new rapidly emerging country, rather than by an established G8 power of the past. It is the first time the summit will be delivered in tandem with the Asia Pacific Economic Cooperation (APEC) leaders’ meeting, taking place immediately after on November 13-14 in neighbouring Yokohama, Japan. It is also the first time the summit will be held in a region where the Cold War has not ended, and where a hot war could break out at any time. The host is a democratic, developed polity devoted to open trade and now a member of the Organisation for Economic Co-operation and Development (OECD).

The Seoul Summit comes with a major G20 business summit, a pre-summit scholarly conference, and just after the first meeting of G20 parliamentarians, all helping bring civil society into G8 governance in a collective way.

The Seoul Summit takes place at a critical time. Needing careful management are the fragile, uneven global recovery currently underway, the possibility of another European financial crisis similar to that in May, the potential threat of a looming “currency war” and debates about containing current account imbalances. Leaders must convince the new American Congress elected on November 2, with its Republican majority in the House of Representatives, that good growth and jobs will soon return. The advanced economy leaders must show suspicious markets eying deeply indebted European countries led by Greece, Portugal and Ireland, and publics protesting painful austerity measures in France and Britain, that they remain committed to the medium-term fiscal deficit and debt reduction targets they promised at the central achievement at their Toronto Summit on June 26-27, 2010. And with new major quantitative easing in the United States and Japan, an undervalued Chinese renminbi, and recent taxes on capital inflows into Brazil and other consequential countries, G20 leaders must move back from the brink of what could become a genuine crisis in the macroeconomic field.

This they are likely to do just enough of to stave off such a new crisis and keep the momentum of G20 co-operation alive. The balanced macroeconomic message from Toronto, highlighting the need for stimulus now, exist soon and fiscal consolidation in the medium term, will be reinforced and repeated in adjusted form. G20 macroeconomic management will be bolstered by taking their Framework on Strong,

Sustainable and Balanced Growth and its Mutual Assessment Process to the next level of detail and determination, with all G20 members credibly committing to making the broad array of adjustments necessary for all to be better off. Despite the war of words that grabs the headlines, the spirit of collective responsibility has started to surface in the final weeks leading up to the Seoul Summit. China again is showing greater exchange rate flexibility and appreciation, as it did just in advance of Toronto. The U.S. delayed its judgement on whether China is manipulating its currency. Japan stopped publicly criticizing China. And the G20 finance ministers meeting Gyeongju on October 22-23 agreed to focus on underlying current account imbalances rather than on just exchange rates, on the responsibility of both surplus creditors and deficit debtors to adjust rather than on just a single country and on a multilateral process to manage the mutual adjustments that will make all better off, rather than on a set of unilateral actions than can harm all.

With macroeconomic crisis and confrontation contained, the Seoul Summit will focus on delivering its two biggest items on its build in agenda, on domestic and international finance. Leaders will politically approve the new rules on the quantity and quality of banking capital, liquidity and leverage that the Basel Committee on Banking Supervision professionally crafted in mid September on the G20’s behalf and that their finance ministers and central bank governors in Gyeongju approved. They will guide work on systemically significant financial institutions, cross-border resolution regimes and derivatives, and address credit rating agencies, accounting standards and other related issues too. They will respond to the predictable proposals for new bank levies and international financial transaction taxes in ways that deflect populist pressures but do not damage the economic recovery and the confident, capital-rich financial system on which it depends.

The second, more politically pressing challenge is to complete the promised shift of at least five percent of the quota share of the International Monetary Fund (IMF) to the rapidly rising emerging economies from Asia, from the declining, established continental European ones. This must be done in a way that the legislatures of all IMF members, including the coalition governments in democratic polities that will lose influence, will ratify back home. Here the Europeans had initially shown few signs to make the necessary accommodations, even as the Americans had used their dominant position in the IMF to induce them to move. Making such a constitutional change in a zero sum game is usually what leaders alone are asked to do. Yet the finance ministers at Gyeongju importantly prepared the way by crafting a creative, balanced bargain that respects the basic needs of those that count. The leaders will approve it at Seoul, thus avoiding the danger of breaking their bargain with a hitherto patient China, India and Brazil.

Less likely is progress on getting the long overdue Doha Development Agenda of multilateral trade liberalization done, despite the activism of World Trade Organization head Pascal Lamy and the free trade convictions of G20 host President Lee Myung-bak. Similarly, mobilizing climate finance will be very difficult, as leaders will be tempted to accept China’s insistence that the subject be left to the United Nations and its conference in Cancun coming just after the Seoul Summit ends. Little beyond stock taking and a set-up for the French-hosted G20 summit in 2011 is likely on the other important issues, notably food security and price volatility, Haiti reconstruction and debt relief, corruption and controlling healthcare costs, coming largely from chronic and non-communicable diseases. However, Lee’s impressive credentials as an environmentally committed leader at home and abroad could see Seoul make badly needed progress in more rapidly eliminating fossil fuel subsidies and in fostering green growth as a whole.

Some success has already come on Korea’s two additions to the G20’s inherited agenda. On financial safety nets, the IMF has responded to meet the need in an appropriately multilateral rather than regional way. Korea’s commitment to development has also helped the Millennium Development Goals move ahead at the UN review summit last September. Seoul will also define new principles and an action plan, drawing on Korea’s own experience in generating growth through instruments beyond public aid.
The Seoul Summit has thus done much good even before it begins. It has already succeeded in producing — by their fast approaching deadlines — first, financial regulatory reform for banks and, second, international financial institutional reform at the IMF. It has already strengthened safety nets at the IMF. It has further provided a basic approach to multilaterally managing current account imbalances and other fundamentals to avoid persistent exchange rate misalignments and the threat of 1930s-like competitive currency depreciations that could cause full-scale currency and other kinds of wars.

These big and small successes already delivered provide a firm foundation for meeting the other formidable challenges the leaders will face on site. They must still craft a macroeconomic message that contains any financial crisis that could erupt in Europe or elsewhere and that nurtures the fragile, uneven recovery, starting in the United States, Japan and Germany. They must move their Framework for Strong, Sustainable and Balanced Growth and its Mutual Assessment Process ahead in ways that offer analytically sound and politically potent peer pressure, so that recovery will be sustained and current account imbalances contained. They must finally promote ecologically sustainable development and mobilize both public aid and all the other instruments to ensure that the investments that have worked in the past are not overwhelmed by the environmental and climate change crises arising in the 21st-century world.

With its existing achievement, the Seoul Summit has already shown that the G20 is a genuine, effective, steering committee for a post-crisis world. But the leaders themselves at Seoul must still solve the outstanding challenges on macroeconomic messaging, mutual economic adjustment and ecologically sustainable development. Only then will they prove that their G20, as they proclaimed at Pittsburgh in 2009, is really a club of systemically significant and responsible equals that genuinely serves as premier forum for economic governance for both its members and for the world as a whole.